Overview of the Tax Cut

Changes in tax rates and an increased child credit are the
centerpiece of this legislation. Here are the main points.

Money in Your Pocket
Whatever else it does, this tax cut will put at least some money in the
pocket of everyone who paid income tax last year. The Treasury will
begin issuing checks as fast as possible based on the new 10% rate. If
you paid tax last year, you'll receive up to $300 (single or married
filing separately), $500 (head of household) or $600 (married filing
jointly or surviving widow(er)). This check is an advance payment on a
credit allowed against your 2001 income tax in lieu of the lower rate.
The idea is to get the money out there as quickly as possible to
stimulate the economy.
If all goes as planned, everyone who filed a year
2000 tax return by April 15 will receive a check by October 1. People
who filed returns on extension will receive their checks later in the
fall. If for some reason you don't receive a check even though you're
entitled to the credit (for example, you didn't owe any income tax in
year 2000), you can claim the credit on your 2001 income tax return.
Some people will receive checks even though they
aren't entitled to the credit because they owe no tax in 2001 even
though they paid income tax in 2000. No problem: you get to keep the
check as a gift from Uncle Sam.

Rate Reductions
The centerpiece of the new law is reduced income tax rates. The 15% rate
remains unchanged (but with a 10% rate carved out at lower income
levels), and all other rates are gradually reduced beginning July 1,
2001. (You won't determine how much of your income is actually in the
second half of the year. In reality the rates in the table below are
one-half of a percentage point higher for 2001.) The lower rates are fully phased in by 2006 as
follows:

28%

31%

36%

39.6%

2001-2003

27%

30%

35%

38.6%

2004-2005

26%

29%

34%

37.6%

2006 -

25%

28%

33%

35%

As noted earlier, unless Congress takes further action, the rates in
the top row of this chart are reinstated in 2011.

Phase-Outs Get Phased
Out
Itemized deductions and personal exemptions are "phased out"
for taxpayers with higher incomes. Years ago I published an editorial in
Tax Notes magazine saying we should phase out the phase-outs. In
my view they're a complicated, unfair and fundamentally dishonest way of
imposing higher taxes. We should use the rate schedules, not gimmicks,
to determine the amount of tax paid by people with higher incomes.
The new tax law does exactly as I suggested, but
delays the effective date for many years. One-third of the effect of
these phase-outs will disappear in 2006, another one-third in 2008, and
they disappear entirely in 2010 (only to reappear the next year under
the "self-repeal" provision of this tax law).

Tax Benefits Relating
to Children
The tax law increases the child credit to $600 immediately (effective
2001). In 2005 it goes to $700, in 2009 to $800, and in 2010 to $1,000.
Thanks to Maine Senator Olympia Snowe, the credit is now refundable in
some circumstances, meaning low-income families with earned income will
benefit from the child credit even if they don't owe income tax.
There are other tax benefits relating to children,
including a more generous dependent care credit beginning in 2003.